Contents

CLOs

Residual value

Case for subordinated CLO investment remains

The investment case for mezzanine and subordinated CLO positions remains strong. One European CLO manager has just announced the second close of a fund investing in such assets, while another Europe-based structured credit fund has reported a 15.6% month-on-month rise in mark-to-market valuations of its subordinated CLO positions.

Pearl Diver Capital has completed a second close of its second fund, PDC Opportunities. The fund - which is actively ramping up - has been structured as a private equity-style vehicle and is similar to Pearl Diver's first fund that was sized at US$150m (SCI 14 October 2009). PDC Opportunities invests in US and European CLOs, sourcing deals from both the primary and secondary market. The firm specifically targets mezzanine, junior mezzanine and subordinated tranches.

Having completed the first close in April 2011 and the second at the end of January 2012, the firm is hoping to complete a third series in the summer. Neil Basu, managing partner at Pearl Diver Capital, confirms that the second fund will ultimately total around US$250m.

The fund's third close - Series C - is scheduled for this summer, he says. "The benefit of closing various series is that we don't have to keep investors holding on until we have raised a specified target amount. Fund raising can take anywhere between nine and 18 months in the current environment. This way, once we have raised a critical mass, we can close a series and deploy capital."

Basu adds: "Investors are at different stages of due diligence, so this approach gives us more flexibility. For example, we could do a €100m single-managed account, if necessary." The fund's investor base consists of private equity investors and fund-of-funds.

The CLO market has had a positive start to 2012, particularly in the US, where primary issuance has stepped up a gear and secondary market activity continues apace. To date, approximately US$5bn of new issues has come to market - the busiest quarter since the summer of 2009 for this sector. Several analysts are predicting that volumes will reach US$20bn by the end of the year.

Secondary market prices have benefitted from the positive tone in the primary CLO market, as well as more positive tone overall in the credit market, thanks to some improvement regarding the US economy and the European sovereign debt crisis. Confirmation of the rally in prices for junior and mezzanine CLO notes has been underpinned by a report from Axa Investment Management's structured credit fund, Volta Finance, which this week reported an 11.1% increase in gross asset value in the first two months of the year.

This was attributed in part to a 15.6% rise in mark-to-market valuations of subordinated CLO positions and a 3.9% rise in mezzanine CLO positions. The vehicle's return year-to-date on assets under management has already outstripped the total increase recorded for 2011 of 10.3%.

"Given where we are in the capital structure, we are confident with our positions," says Basu. "Underlying fundamentals continue to improve, particularly in the US market. We are looking to support US primary CLO deals as well, as that market opens up and become more active."

He concludes: "We see every new CLO deal that goes through town, as well as many BWICs, and we currently have no problem in sourcing the right deals for our fund."

AC

Structured Finance

BWICs keep on coming

The BWIC onslaught continues in the European secondary ABS sector. While bid-lists are keeping participants busy for now, one trader reports that the market is crying out for some more variety.

"It has been quite quiet on the flow front. The primary market is slow, but there have been quite a lot of BWICs in the secondary market - last week especially and then there was another one today, as well," he says.

The trader notes that the recent bid-lists have been dominated by German bad banks offloading assets. Why they are choosing this particular time to sell is a little unclear, however.

"Many German bad banks are using these BWICs to sell. I really do not know exactly why they are selling now, but they keep coming and they are making up a large proportion of the lists," the trader confirms.

He continues: "The lists have typically been €1bn-plus and those have been coming to the market each week for a little while now. Sellers seem to be getting pretty good execution on them - not perhaps quite as good as the 2011 highs, but in some asset classes we are getting pretty close."

Away from the bid-lists, the ABS market has been pretty quiet. While the BWICs are being well received, the trader admits that enthusiasm is not as strong as it once was.

"I think everyone is getting a bit bored of them now, to be honest," he says. "They have been fairly well received and the levels are pretty good, but I think there is a limit to the number of BWICs we can take."

The trader believes that what the market needs now is some new sellers. He notes that a couple of smaller lists are due out later in the week, but nothing too far out of the ordinary is expected.

"The BWICs are keeping the market busy for now, but what we really need is more sellers. For now, we are really just waiting to see who those next sellers will be," he concludes.

JL

Structured Finance

SCI Start the Week - 19 March

A look at the major activity in structured finance over the past seven days

Pipeline
FirstRand Bank's £239m Turbo Finance 2 auto ABS entered the pipeline last week. Two ILS deals (Blue Danube 2012-1 and US$150m Combine Re) and three CMBS (US$324.8m BAMLL-DB 2012-OSI, US$452.79m Liberty Revenue Refunding Bonds series 2012 and US$925m WFRBS 2012-C6) are also being marketed.

Pricings
Last week was the busiest of the year so far for pricings. Sixteen deals, including the €3.52bn FTA Santander Empresas 11 CLO, printed. The week saw one other CLO print (US$360.78m Babson CLO 2012-1), as well as six auto ABS deals, four RMBS transactions, two equipment ABS deals, one structured settlements ABS and a timeshare ABS.
The largest auto deals were US$1.43bn Mercedes-Benz Auto Lease Trust 2012-A and US$1.11bn Nissan Auto Lease Trust 2012-A. They were joined by US$425m AESOP Funding II 2012-2, US$155m CPS Auto Receivables Trust 2012-A, US$1.25bn Santander Drive Auto Receivables Trust 2012-2 and Sfr308m Swiss Auto Lease ABS 2012.
The largest RMBS to print was a US$2.36bn-equivalent UK RMBS - Silverstone Master Issuer series 2012-1. That deal was joined by £239m ALBA 2012-1, €398m Civitas 2012 and €406m Mars 2600 2012.
The two equipment ABS deals to price were US$800m CNH Equipment Trust 2012-A and US$685.4m GE Equipment Transportation Series 2012-1. Finally, the structured settlement ABS issued was the US$232.44m JGWPT XXV, with the US$450m Sierra Timeshare 2012-1 Receivables Funding rounding out the issuance.

Markets
Despite the heavy supply in new issue US ABS, the secondary market remained very active last week, according to ABS analysts at JPMorgan. "Two large short card and auto lists traded at spreads that were either firm or tighter," they report.
Overall on the week, two- and three-year triple-A credit card floaters tightened by 1bp and 2bp respectively. Two-year triple-A subprime auto spreads narrowed by 5bp.
Equipment spreads also tightened across the curve. Triple-A FFELP spreads narrowed by 5bp across the curve.
The apparent stabilisation in the global macro backdrop that has emerged this year continued to lead US CMBS spreads tighter, say securitised products analysts at Citi. Generic 2007-vintage dupers are now at 175bp over swaps, 95bp tight to their year-end level, while GG10 dupers are at 220bp - 55bp tight to year-end. 2007 AMs and 2.0 triple-Bs are at 400bp and 525bp respectively - 300bp and 150bp tight to their year-end levels.
In US RMBS, residential credit analysts at Barclays Capital say: "Non-agencies remained relatively flat, despite the upward pressure in credit sectors. The one exception was in negam, where prices rose a half point. Synthetic indices preformed similarly, with little change in the PrimeX indices, while deeper-credit ABX 07 AAA prices rose 0.5-2.0 points."
There was also little movement in US CLOs. According to Bank of America Merrill Lynch CLO analysts, triple-As came in 5bp on the week, double-As were unmoved and the other major points down the capital stack all edged in by 25bp.

Deal news
• The Fed is to continue reinvesting principal payments from its holdings of agency debt in agency MBS. A new study illustrates that the Fed's actions have been a major technical factor in the agency MBS market.
• The launch of ISDA's 2012 US Municipal Reference Entity CDS Protocol is expected to boost liquidity in the market, especially for single name muni CDS. But, despite efforts to increase standardisation, MCDS contracts will continue to feature a number of unique quirks.
• Dock Street Capital Management has been retained to act as liquidation agent for Ipswich Street CDO. The collateral will be sold to the best qualified bidders in two public sales on 27 March.
• A number of changes have been made to the management structure of the €560m Quokka Finance, a German multifamily CMBS. These include a change of property manager and borrower general partner.
• Cengage, the seventeenth largest corporate exposure and represented in about half of the CLO universe, is targeting a three-year extension on its 2014 loan. Participants in the amendment would benefit from a 30% loan pay-down, increased spread and a consent fee, according to LCD.
• The operating advisor on Deco 17 - Pan Europe 7 has replaced Hatfield Philips with Deutsche Bank as special servicer for the Mayne loan. Moody's notes that, based on its assessment of the capability of Deutsche Bank to perform the role, the replacement will not result in a reduction or withdrawal of the current ratings of the notes.

Regulatory update
• A recent Michigan Court of Appeals decision over the Cherryland Center loan securitised in GMACC 2002-C3 has the potential to challenge the main tenets of the CMBS market - the non-recourse nature of the loans. The ultimate outcome of the litigation is likely to be positive for CMBS investors, according to CRE debt analysts at Deutsche Bank.
• Ireland and Spain are set to introduce new debt forgiveness legislation in the coming months that will not only impact their domestic mortgage markets, but may also have ramifications for the associated RMBS. Investors are keeping a close eye on developments, particularly with regards to whether the forbearance measures become compulsory.
• Further details have emerged on the US$25bn servicer settlements that the US federal government and attorneys general agreed with Ally, Bank of America, Citibank, JPMorgan and Wells Fargo. The largest impact is expected to be on deals serviced by Bank of America.
• The US SEC has approved the DTCC's application to operate a new central counterparty designed to reduce risk and costs in the US agency MBS market. Starting on 2 April, the MBS division of DTCC's Fixed Income Clearing Corporation (FICC) subsidiary will begin guaranteeing settlement of all of its members' matched MBS trades and introduce pool netting that will further streamline settlement on the related delivery obligations.
• Fitch has identified one implementation of the Volcker Rule that could have unintended consequences for corporate issuers that access capital through the leveraged loan market and CLOs. This risk has been also been noted by several industry associations, notably the Loan Syndications and Trading Association (LSTA).
• The availability of new products and domestic financial institutions' entry into overseas markets is driving rapid change in the Chinese derivatives market, according to a new report from Celent. The report finds that while Chinese regulation is strict, it is evolving towards a more open, orderly derivatives market.
• The NCUA and HSBC have reached a settlement regarding potential claims relating to the sale of RMBS to five failed wholesale credit unions. HSBC has agreed to pay NCUA US$5.25m.
• ESMA has confirmed that it considers the regulatory frameworks for credit rating agencies of the US, Canada, Hong Kong and Singapore to be in line with European rules. EU regulations require the authority to assess whether the requirements of third-country CRA regimes are "as stringent as" the European ones.
• The ability of Singaporean banks to issue covered bonds is one step closer, following the release of a Monetary Authority of Singapore (MAS) consultation paper on the asset class. MAS is proposing that banks incorporated in Singapore may issue covered bonds subject to the aggregate value of assets in the cover pool being capped at 2% of the value of the total assets of the bank.
• The US SEC has published an analysis of market data related to credit default swap transactions. The analysis is available for review as part of the comment file for rules proposed jointly with the CFTC to further define the terms 'swap dealer', 'security-based swap dealer', 'major swap participant', 'major security-based swap participant' and 'eligible contract participant' under Title VII of the Dodd-Frank Act.

Deals added to the SCI database last week:
AEP Texas Central Transition Funding III
Ally Auto Receivables Trust 2012-2
Domino's Pizza Master Issuer series 2012-1
East Lane Re V
Morgan Stanley Capital I Trust 2012-C4
Pelican Mortgages No. 6
Principal Residential Investment Mortgages 1
SLM Student Loan Trust 2012-2
SMART series 2012-1US Trust
Spoleto Mortgages 2011
Volvo Financial Equipment series 2012-1

Deals added to the SCI CMBS Loan Events database last week:
BACM 07-1 & GECMC 07-C1; BACM 2006-6; BACM 2007-3; BACM 2007-5; BSCMS 2007-PW18; CD 07-CD4, WBCMT 05-C17 & CGCMT 06-C4; DECO 17; DECO 2006-C3X; ECLIP 2007-1; ECLIP 2007-1A; EMC 3; EMC 6; EURO 22; GCCFC 2004-GG1; GECMC 2006-C1; GMACC 2002-C3; GSMS 2005-GG4; IMMEO 2; JPMCC 2005-LDP1; JPMCC 2005-LDP5; JPMCC 2006-CB17 & JPMCC 2006-LDP9; JPMCC 2006-LDP9; JPMCC 2007-CB18; JPMCC 2008-C2; MLMT 2005-MCP1; MSC 2006-IQ12; QUOKK 2006-1; TAURS 2006-1; TITN 2007-CT1; TMAN 6; TMAN 7; UBSCM 2007-FL1; Various (CRE auctions); WBCMT 2003-C9; WBCMT 2007-WHALE 8; and WINDM XIV.

Top stories to come in SCI:
US CLO issuance trends
Growth of liability-driven investment
Impact of RMBS litigation on valuations

CLOs

A2E record reached

At nearly US$17.3bn across 14 different issuers, February's US loan amend-to-extend (A2E) volume was the most since April 2011 and its number of amending issuers a record high, according to CDO strategists at RBS. This is said to reflect broader market recognition that A2E is an inexpensive way for issuers to take advantage of the open credit markets and low rate environment to push out their maturities.

The average spread of a new issue single-B loan in February was 582bp, the RBS strategists note, while the average post-A2E spread is only 385bp and doesn't include Libor floors. Consequently, over the past two months, the current increase to spread in amended loans was only 188bp.

"While we typically expect to see lower rated issuers using amend-to-extends as it is generally more difficult for these borrowers to obtain refinancing, this month we observed that 13 of the 14 issuers that used A2E to push out their debt maturities were rated single-B and higher. This leads us to believe that the relative cheapness of A2E, despite only giving 2.62 years of maturity relief compared to 6-7 years for refinancing, has provided enough incentive for issuers," the strategists observe.

Meanwhile, new loan issuance picked up in February for the second consecutive month. The total volume of new loans was US$33.5bn, the largest monthly total since June 2011.

In addition, all-in single-B new issue spreads (including Libor floors) collapsed from 683bp in January to 582bp in February. This led to issuers paying the lowest spread on new loans in nine months, the strategists say.

CMBS

Maguire property fates become clearer

Maguire Properties has filed its 10-K statement with the US SEC, shedding light on a number of CMBS properties sponsored by the company. Several loans are either in, or heading for, receivership - although not all properties are set for disposal.

The US$470m Two California Plaza loan securitised in GSMS 2007-GG10 is likely to be placed in receivership shortly. It has underperformed since securitisation and was transferred to special servicing in December 2010.

CMBS analysts at Barclays Capital note that modification negotiations had been ongoing for some time but believe Maguire, having failed to secure a modification, is now focusing on an exit from the asset. They say a liquidation sale is likely and expect a loss severity of around 30%-35%.

The Barcap analysts add: "Despite the appraisal reduction, the loan is currently not taking any ASERs. This will likely change and we expect an additional US$890,000 of ASER-related monthly interest shortfalls to hit the trust in the coming months."

The US$125m Glendale Center loan in WBCMT 2006-C27 is also likely to be liquidated. The loan has been in special servicing since October 2011 (see SCI CMBS loan events database) and Maguire has said it is pulling out of the Glendale market. The analysts note that NCF DSCR on the property is just 1.04x and predict loss severities of around 30%.

Maguire has also indicated that it will exit Stadium Towers Plaza and 500 Orange Tower this year. The US$100m and US$103.5m loans, securitised in JPMCC 07-LDP11 and GSMS 2007-GG10 respectively, have each been in special servicing for around 2.5 years. Receivers were appointed for both loans in early 2011 and both are anticipated to be liquidated shortly.

It is a slightly different situation for 3800 Chapman, the US$44.3m loan securitised in GSMS 2007-GG10. The 10-K indicates that the debt has a defined amount of recourse against Maguire Properties.

"As such, Maguire may be required to continue to operate the property to avoid triggering the debt service guaranty. We believe the property should continue to perform in the near term, although there is some possibility of a negotiated disposal, along with some cash payment to release the debt service guaranty," the analysts note.

It would also appear that Maguire does not intend to dispose of US Bank Tower, Wells Fargo Tower or Gas Company Tower. The US$250m US Bank Tower (securitised in BSCMS 04-T14, GCCFC 03-C2 and MSC 04-T13) and US$550m Wells Fargo Tower (securitised in GSMS 07-GG10) were each transferred to special servicing in March 2011 before being returned to the master servicer. They are currently struggling to cover debt service.

Maguire delivered a notice of imminent default on the US$458m Gas Company Tower loan (securitised in JPMCC 06-LDP8 and WBCMT 06-C28), but the loan has not been transferred to special servicing. The company's 10-K filing shows it has tax indemnification obligations on US Bank Tower, Wells Fargo Tower and Gas Company Tower towards Robert Maguire, which the Barcap analysts note could prevent a disposition.

Finally, Maguire reported that it believes the US$273m 777 Tower in BACM 2006-6 could generate excess cash proceeds in the event of a disposal. The property is reporting 0.97x NOI DSCR and is scheduled to mature in November 2013.

JL

CMBS

Recourse wrangling

A recent Michigan Court of Appeals decision over the Cherryland Center loan securitised in GMACC 2002-C3 has the potential to challenge the main tenets of the CMBS market - the non-recourse nature of the loans. The ultimate outcome of the litigation is likely to be positive for CMBS investors, according to CRE debt analysts at Deutsche Bank.

The collateral for the Cherryland Center loan (US$8.7m original balance) was a 164,000 square-foot anchored retail property in Traverse City, MI, which got into trouble when the occupancy began to fall and pushed the DSCR below 1.0x. "Once the asset fell into default, the trust took the unique approach to secure proceeds through arguing the borrower failed to keep the SPE solvent and was therefore liable for the deficiency judgment," the Deutsche analysts explain.

The Michigan Court of Appeals sided with the trust. What will happen next is unclear, but the analysts suggest a few possibilities.

The first is that the Michigan Supreme Court agrees to take the case and eventually reverses the lower court's ruling. A briefing is scheduled for next week to discuss the merits of the case, after which a decision will be made on whether to proceed or not.

Of course, the analysts add, the Court could also agree to take the case and agree with the current opinion. A third possibility is that a newly-introduced bill becomes law and effectively nullifies the ruling. The fourth scenario, and worst outcome from a borrowers' perspective, is that similar cases are brought in other states and their courts agree with Michigan's.

Although there are a myriad of outcomes, the analysts say: "We view all of this as a positive for CMBS investors, especially those invested further out the legacy credit curve. We believe the fear of some CMBS loans turning into recourse will allow special servicers to exert much more leverage in the negotiation process. More equity contributions on modified loans are likely and in some cases borrowers will come out of pocket to cure defaults or prevent defaults where it is viewed as a lower cost option (as opposed to letting a loan become delinquent and have a trust pursue full recourse due to the Cherryland decision)."

The subset of loans that are impacted for now is limited to those secured by properties in Michigan. However, the number of loans is actually smaller.

According to the analysts, the crux of the issue is how the loan agreements were written and each originator uses a slightly different template. For example, they explain: "The language in the loan agreement used at Deutsche Bank would not be open to the same outcome as the Cherryland case due to the way the SPE solvency covenant is defined."

Nevertheless, the analysts conclude: "There are potentially at least US$1bn of loans that are at risk and, if other states adopt a similar stance, perhaps upwards of US$5bn. Keep in mind the delinquency rate on CMBS loans secured by Michigan properties is about 50% higher than the CMBS universe at over 13%."

MP

RMBS

Fed's role in agency MBS discussed

The Fed is to continue reinvesting principal payments from its holdings of agency debt in agency MBS. A new study illustrates that the Fed's actions have been a major technical factor in the agency MBS market.

The Fed's MBS reinvestment programme has been a net buyer of US$136bn of agency MBS since October 2011, according to MBS strategists at RBS. Approximately 90% of its purchases have been concentrated in 30-year production coupons (3.5s and 4s).

Looking ahead, the projected amount of reinvestments for 2012 depends on expected rates of prepayments and principal payments of agency MBS and agency debt. The RBS strategists estimate that around US$310bn is likely to be purchased this year, with around US$250bn likely being reinvested through the remainder of 2012.

A common perception is that the Fed's reinvestment programme will drive a significant reduction in mortgage rates. The 30-year mortgage rate and current coupon MBS yields fell sharply following the announcement of the program on 22 September 2011, declining by 13bp and 25bp respectively.

"The downward spike in mortgage-related yields suggests the short-term impact of the Fed's reinvestment programme was significant," the strategists note. "However, the effects on mortgage rates and current coupon yields dissipated quickly. Within one month of the announcement, 30-year mortgage rates increased from around 4% to around 4.2%, returning to the pre-announcement level. Meanwhile, the current coupon yield showed a similar back-up during the same period."

The strategists measured the impact of the programme on MBS spreads using Libor-OAS and nominal spread. The results suggest a significant effect on mortgage spreads, with a decline of 30bp in OAS and a drop of 25bp in nominal spread following the announcement. While spread over treasuries remains relatively low for a longer time, partly resulting from rising 10-year yields, the Libor-OAS steadily bounced back, offsetting the initial movements created by the Fed's announcement.

"Nonetheless, the immediate effect of the FOMC statement shows the policy did influence the market and will likely influence the expectations of market participants in the future," the strategists observe. They add that the impact of policy actions on mortgage rates and MBS demand could be obscured by other factors, such as economic developments and mortgage servicer hedging activities after the FOMC meeting.

CS

CDO

School CDO suit settled

Stifel Financial has settled with five Wisconsin school districts in a lawsuit regarding mis-sold CDO investments (SCI 10 February 2010). The case concerns investments created by RBC and purchased by the districts, with Stifel acting as the districts' public finance investment banker.

Under the terms of the settlement Stifel has paid US$13m to Kenosha Unified School District, Kimberly School District, School District of Waukesha, West Allis/West Milwaukee School District and Whitefish Bay School District. It has also provided a standby letter of credit for an additional US$9.5m, to be paid after Stifel resolves a related case with the US SEC.

Stifel has also relieved and released the districts from US$154m in moral obligations to repay trust obligations arising under asset-backed notes originally owned by Depfa Bank. The notes were issued to fund purchases of synthetic CDOs from RBC.

Following this settlement, Stifel will join with the districts and their trusts in a suit against RBC. They believe there were misrepresentations, omissions and conflicts of interest embedded in the CDOs manufactured by RBC and are seeking more than US$200m.

CDS

Derivatives lawyer joins NY office

Ilene Froom has joined Jones Day in its New York office. She joins the firm as a partner to add depth to its structured and derivative products group within its banking and finance practice.

Froom joins from JPMorgan Chase, where she was executive director and assistant general counsel. She has substantial experience in transactions involving credit, foreign exchange and interest rate derivatives.

CDS

Laywer joins derivatives team

Field Fisher Waterhouse has recruited Daniel Franks for its derivatives and structured finance group. He will join in April as partner.

Franks was most recently counsel at Allen & Overy, where he specialised in a range of privately negotiated derivatives including structured repos, structured credit and equity and alternative financing. He also advises in connection with the hedging of securitisations and other structured finance transactions and on the enforceability of derivatives against various counterparty types.

CLOs

Investment firm adds two

London-based securitised products investment firm Pearl Diver Capital has announced two new appointments. Michael Brown has been named avp, structuring and quantitative analytics, while Georgia Jelliman has been appointed head of operations/middle office. Matthew Layton, vp of credit, has been promoted to partner at the firm.

Chandrajit Chakraborty, managing partner and co-founder, continues as cio and leads Pearl Diver's trading and investment activities.

CMBS

CRE debt JV formed

Hudson Realty Capital and RXR Realty have launched a CRE lending platform to originate and purchase CRE debt assets. The joint venture will focus on first-mortgage bridge loans as well as B-notes, mezzanine and preferred equity opportunities in the New York tri-state region.

RXR has significant experience operating in these markets and will provide real estate underwriting through use of its investment management, property operations and corporate operations teams. Hudson manages a portfolio of more than US$2bn in real estate assets and will offer due diligence, asset management and loan servicing expertise.

The joint venture will largely target loans or make investments in amounts between US$10m and US$50m throughout the capital stack. It will participate in most property types, including office, multi-family, retail, industrial, mixed-use and self-storage.

CMBS

CRE firm appoints sales md

Jordan Cortez has joined Rockwood Real Estate Advisors as md. He will be based in Dallas and lead the firm's investment sales efforts throughout Texas and the Southwest as well as executing complex debt and equity engagements nationally.

Cortez joins from Johnson Capital where he was equity finance vp in New York and focused on large scale equity raises and structured finance assignments. He has also previously worked at Apartment Realty Advisors, Cushman & Wakefield and Swearingen Realty Group.

Rockwood became a member of CW Financial Services last year (SCI 24 May 2011). The firm has opened new offices in New York, Atlanta, Bethesda and Cincinnati over the last six months and plans to further expand its Dallas office in the near future.

ABS

Auto ABS losses hit new low

US prime auto ABS losses dropped to a new record low last month, according to Fitch's latest index results for the sector.

Prime annualised net losses (ANL) dropped by 28% in February to 0.38%, down from 0.53% in January and 57.8% better year-over-year (YOY). This compares to the prior low of 0.41% in June 2011.

Used vehicle values have been strong for the past four months, recording gains in each month since November. To date, Fitch has seen little impact from rising gas prices on the demand and values of larger, less fuel efficient vehicles.

Prime cumulative net losses (CNL) also hit a new record low, declining by 11.5% to 0.46% in February - 40.3% lower YOY. These improvements are the highest month-on-month and YOY declines for the past twelve months for both the ANL and CNL indices, Fitch notes.

Prime 60+ day delinquencies declined by 9.8% MOM to 0.46% in February and were 24.6% lower YOY versus February 2011.

But subprime performance experienced a modest pull-back in February. ANL increased by 1.8% MOM to 6.67% from 6.55% and were 12.3% higher YOY. 60+ day delinquencies rose by 3.6% MOM to 3.43% in February and were 5.6% higher versus a year earlier.

Structured Finance

Third-party CRA regimes endorsed

ESMA has confirmed that it considers the regulatory frameworks for credit rating agencies of the US, Canada, Hong Kong and Singapore to be in line with European rules. EU regulations require the authority to assess whether the requirements of third-country CRA regimes are "as stringent as" the European ones.

This confirmation allows European financial institutions to continue using for regulatory purposes credit ratings issued in these countries after 30 April 2012. ESMA says its assessment of third-country CRA regimes is an important tool for enhancing internationally consistent supervision of CRAs.

For the endorsement by EU CRAs of credit ratings issued in non-EU countries, the ratings must be issued by CRAs that are registered or licensed and are subject to supervision in those countries. This is already the case for the US and Hong Kong. In Canada and Singapore the registration of CRAs is at an advanced stage and is expected to be completed before 30 April.

To facilitate regulatory information exchange and as a precondition to endorsement, ESMA has also entered into cooperation agreements for the supervision of CRAs with the national competent authorities of the US, Canada, Hong Kong and Singapore.

Last December, ESMA announced the endorsement of ratings issued from Australia. The authority is currently working to finalise where possible the assessments of Argentina, Mexico and Brazil and to conclude cooperation agreements as soon as possible.

Structured Finance

Euro SF macroeconomic drivers identified

A new S&P report identifies five of the top macroeconomic factors that the agency believes are most relevant to the credit quality of European structured finance securities and, therefore, to its rating actions. These factors include GDP growth, the unemployment rate, property prices, bank equity returns and the corporate credit risk premium.

S&P selected its top-five factors by examining correlations between macroeconomic variables and European structured finance rating movements. The agency then conducted a sensitivity analysis to gauge what degree of change in the top-five factors might be linked to average ratings migration of a full rating category (that is, three notches). It also explored three distinct stress scenarios - using its base-case economic assumptions for 2012, the benign market conditions of 2003-2007 and a severe downturn equivalent to the US Great Depression - to assess their potential rating implications.

The worst-case scenario would likely result in substantial downward rating migration, S&P notes. For example, a hike in the European unemployment rate to 25%, a 50% drop in real estate prices or a 26.5% decline in the EU-27 GDP would result in roughly a 10-notch average downgrade for European structured finance tranches, according to the analysis.

By contrast, a repeat of the benign period from 2003-2007 could spur an average 0.4-0.7 notch rise. In the base-case scenario there is minimal change in the underlying economic variables and therefore credit quality and ratings would not change significantly.

"The findings from our study indicate that GDP growth, unemployment, property prices, bank equity returns and the corporate credit risk premium have historically been linked with changes in credit quality for European structured finance securities," says S&P credit analyst Andrew South. "While our base-case scenario suggests that average credit quality for these asset classes will be broadly flat in 2012, we believe the European sovereign debt crisis continues to present significant downside risks."

For example, any further sovereign or financial institution downgrades may have implications for structured finance ratings. In addition, the agency believes there is a chance of a more pronounced recession in Europe, which could lead to further collateral deterioration and more rating actions.

Structured Finance

Moody's warns on credit easing

Relaxed underwriting standards, more complex structures and the entrance of new untested market participants have led to an increase in credit risk for US securitisations, according to Moody's. The agency says that while the riskiness of securitisations is still low compared to the level it reached in 2006 and 2007, the signs of credit easing in originations are evident in a number of asset classes that have traditionally backed securitisations - autos, credit cards, and commercial and residential property.

"While this increased risk is not unusual for this phase of the credit cycle, investor protections built into transactions must keep pace with these developments," says Moody's md Claire Robinson. "In some instances, that increased risk has not been adequately mitigated to support the high credit ratings that securitisation sponsors desire."

Another sign of a relaxation from the extremely tight credit conditions that prevailed in the years following the crisis is the appearance in the structured market of new non-investment grade issuers, new non-prime asset classes and new financial backers. "These developments indicate that a more robust securitisation market is emerging, with investors more willing to fund non-traditional assets and issuers," adds Robinson. "Not all of these transactions will merit top Moody's ratings, however. We expect that we may assign more low- to mid-investment grade ratings to these non-traditional transactions."

If inadequately mitigated, some structural features that have appeared in securitisations since 2009 also represent increased risk to investors. "Some of the smaller, less well capitalised entities lack the ability to honour the representations and warranties protections investors rely upon," Robinson concludes. "Others lack a record of providing solid servicing or they lack comprehensive reporting procedures and back-up plans, all of which protect investors in the event of originator or servicer bankruptcy."

Structured Finance

Negative ratings migration continues

Global structured finance rating activity remained negative in 2011, as the number of downgrades outnumbered upgrades by an 11 to 1 margin, according to Fitch's latest ratings migration study. Approximately 33% of SF securities were downgraded last year - a share that is nearly even with 2010 - while 3% were upgraded.

However, the impairment rate across global SF securities declined to 8.4% in 2011 from the 13.5% seen in 2010. The investment grade impairment rate declined to 0.7% in 2011, from 2.1% the prior year.

There were no triple-A impairments reported in the ABS, CMBS and structured credit sectors during the year. The RMBS triple-A impairment rate was 0.6% in 2011.

Structured Finance

Slight up-tick seen in CRE CDO delinquencies

CRE CDO delinquencies rose slightly in February to 13.4% from 13.2% in January, according to Fitch's latest index results for the sector. Asset managers reported 13 new delinquent assets during the month.

Similar to the previous month, multiple interests in the same matured balloon loan comprised the largest portion of new delinquencies. A-notes secured by the Cadillac Fairview retail mall portfolio, which matured last month, contributed to three different CDOs managed by two separate asset managers.

Meanwhile, new delinquent assets consisted of: six new matured balloon loan interests; three term defaults; two repurchased assets; and two new credit-impaired securities. Offsetting these new delinquencies, eight assets were removed from the index in the month, including two assets disposed of at a loss.

In February, CRE CDO asset managers reported approximately US$30m in realised losses. The largest loss, which totalled US$22.3m, was related to the sale of a REO failed condominium conversion project located in Midtown Manhattan.

The disposal of the condominium conversion added to the steep decline in the delinquency rate for that property type to 5% from 24% at end-2011. Hotels have the highest increase since end-2011 at 20% from 16%, primarily due to the maturity default of the Kerzner portfolio.

Current delinquency rates for all asset types are: 34% for land (representing 5% of total collateral); 21% for construction (1%); 20% for hotel (15%); 13% for retail (7%); 12% for rated debt (22%); 12% for multifamily (15%); 12% for industrial (1%); 10% for office (24%); 5% for condo (2%); and 3% for other (4%). The remaining 3% is comprised of uninvested principal proceeds.

In February, 31 of 33 Fitch-rated CRE CDOs reported delinquencies ranging from 0.7% to 54.8%. Additionally, 36% of Fitch-rated CRE CDOs were failing at least one overcollateralisation (OC) test.

Structured Finance

MAS proposals positive for covered bond investors

A consultation paper on covered bonds issued by the Monetary Authority of Singapore (SCI 12 March) includes proposals that would provide protection to investors in terms of quality covered assets, as well as through specifying minimum overcollateralisation levels and a requirement for ongoing monitoring of risk, according to Moody's.

"But they do not cover areas, such as legal protection of cover pool segregation, and do not provide enough detail on operations and servicing," says Jerome Cheng, a Moody's vp and senior credit officer. "These areas would have to rely on the protection of the existing legal framework and the incorporation of contractual arrangements into covered bond programmes."

Covered bonds are new to Singapore and no programmes have been issued as of yet. "According to the proposals, covered assets can only include residential mortgage loans and derivatives held for the purpose of hedging risks arising from covered bond issuance. These restrictions would be credit positive as residential mortgage loans have proven to be the best performing assets on bank balance sheets," says Cheng.

In addition, the appointment of qualified external third-party transaction parties would improve monitoring of assets, says Cheng. "The appointment of a cover pool monitor would provide an additional layer of checks and balances, mitigating operational and fraud risks, as well as offering additional protection to investors."

However, unless the proposed rules are enacted to law, the separation of the cover pool from the bankruptcy estate of the defaulted issuer would still rely on the current legal regime. The processes, procedures and formats under which a bank segregates the cover pool would have to comply with all existing legal and regulatory requirements.

CDO

CRE CDOs hit

S&P has placed 697 ratings from 97 publicly rated CRE CDOs and re-REMIC transactions - representing an aggregate issuance amount of US$45.4bn - on credit watch with negative implications. The actions follow the update to the agency's criteria and assumptions used to rate CDO transactions backed by structured finance (SF) collateral (SCI 22 February).

The credit watch placements affect 71% of S&P's ratings on US and Canadian CRE CDO and re-REMIC transactions. The agency expects the new criteria to result in the downgrades of many rated CRE CDOs and re-REMICs that are backed by, or reference, CMBS, and commercial real estate interests and loans. It expects the reviews of the transactions placed on credit watch negative to be resolved within six months.

CDO

ABS CDO acceleration rescinded

In an unusual move, a majority of the controlling class in Belle Haven ABS CDO 2006-1 has waived the deal's existing EODs, as well as rescinded and annulled its acceleration. As a result, the EODs are deemed to be cured, with the trustee and the noteholders restored to their former positions and rights under the indenture.

An EOD occurred on 14 April 2008 when the class AB overcollateralisation ratio fell below 95%. A further EOD occurred when the net outstanding portfolio collateral balance fell below 105% of the aggregate outstanding amount of the class A1 notes. A majority of the controlling class directed the acceleration of the notes on 23 September 2008.

NIBC Credit Management was replaced by Cairn Capital as collateral manager on the transaction in November 2011 (see SCI CDO manager transfer database). Under the collateral management agreement, the manager may be removed without cause if the class AB overcollateralisation ratio is less than 100% for a period of more than 180 consecutive calendar days.

CDO

Muni CDO criteria revised

S&P has published its revised methodology and assumptions for rating CDOs and pooled tender option bonds (TOBs) backed by US municipal debt, effective from 19 March. The agency says the move represents a significant recalibration of its criteria and is aimed at enhancing the comparability of CDO and TOB ratings with ratings in other sectors.

The updated criteria differ from the previous criteria for rating CDOs and pooled TOBs backed by US municipal debt in several ways. The updated criteria:

• Apply supplemental stress tests in addition to the stochastic default modelling;
• Increase the number of municipal debt industry classifications to 65 from 61;
• Reduce the expected recovery parameter for defaulted general obligation (GO) debt to 85% from 90% in the triple-A liability stress;
• Tier the expected recovery parameters for defaulted GO debt in the double-A to triple-C liability rating stresses to a range of 90% to 98% recovery from a flat 90%;
• Introduce three new recovery groupings for non-GO debt and reduce expected recoveries in the triple-A liability stress to a range of 37% to 75% from 50% to 78%;
• Tier the defaulted debt recovery parameters for the three new recovery groupings in the double-A to triple-C liability rating stresses;
• Adopt the same asset default parameters for municipal debt as the ones used in the 2009 corporate CDO criteria;
• No longer cap asset default parameters for municipal debt longer than 10 years at the 10-year value;
• Increase the inter-industry asset correlation to 0.05 from 0.01; and
• Adopt the same simulation rating quantiles for municipal debt as the ones used in the 2009 corporate CDO criteria.

CDO

EMEA SF CDOs hit

S&P has placed or kept on credit watch negative its credit ratings on 238 tranches from 57 CDOs, backed by pooled structured finance (SF) assets. The actions follow the agency's update of its criteria and assumptions used to rate CDO transactions backed by SF securities (SCI 22 February).

The credit watch negative placements affect nearly all of S&P's ratings on EMEA SF CDO transactions. The agency has also placed on credit watch negative several CDOs with significant holdings of tranches issued by corporate-backed CDOs. It believes that these CDOs will be affected because of the revised recovery rates applied to corporate CDOs as part of the criteria changes.

S&P intends to resolve the credit watch placements within six months.

CDO

ABS CDO auction due

Dock Street Capital Management has been retained to act as liquidation agent for Ipswich Street CDO. The collateral will be sold to the best qualified bidders in two public sales on 27 March.

CDO

Stay granted in Citi CDO case

A panel of the Second Circuit Court of Appeals last week granted the SEC's motion to stay proceedings of its action against Citigroup, pending resolution of the parties' appeal seeking to set aside Judge Rakoff's rejection of the settlement agreement. The SEC had accused Citi of selling a US$1bn CDO called Class V Funding III, without disclosing that it was betting against US$500m of those assets (SCI 20 October 2011).

In rejecting the parties' settlement, Judge Rakoff said that the deal was not in the public's interest and objected to the SEC's practice of allowing a settling defendant to neither admit nor deny wrongdoing as part of the deal. In its decision, the Second Circuit noted that it is not the proper function of federal courts to dictate policy to executive administrative agencies and found that Judge Rakoff did not give proper deference to the SEC's judgment on discretionary matters of policy, according to lawyers at Lowenstein Sandler. For these and other reasons, the panel stated that the parties were likely to prevail on the merits of their appeal of Judge Rakoff's rejection of the settlement.

CDS

Greek CDS settled as expected

The final price of the Hellenic Republic bonds for the purpose of settling CDS transactions has been determined at 21.5%. A realised recovery rate of between 20%-25% had been expected, with the final figure more likely to be at the lower end of the range.

Credit analysts at Citi note that Greek domestic law bonds were trading in the mid-20s before the PSI. After the PSI, investors received 15%, some GDP warrants and a reduced notional of new 30-year bonds that - once discounted at an appropriate rate - had a face price in the mid-20s.

The Citi analysts point out that if these bonds had a greater reduction in notional and were shorter-dated or had a higher coupon, they might have had the same post-PSI present value but a higher face value. This would have resulted in a low recovery rate, making CDS settlement look much less fair, they suggest.

During today's CDS auction, 14 dealers submitted initial markets, physical settlement requests and limit orders to settle trades across the market referencing the sovereign.

CDS

Correlation book unloaded

Crédit Agricole has transferred the market risk of its legacy credit correlation business to BlueMountain Capital Management and is said to have reduced its risk-weighted assets by €14bn as a result. A newly-established vehicle dubbed Alpine will reportedly hold the assets, with the French bank providing a liquidity facility.

BlueMountain told SCI last September that it was making "significant progress" in acquiring large legacy credit correlation portfolios (SCI 23 September). The aim is to capitalise on European banks looking to shed assets due to increased regulatory capital requirements.

CDS

SN CDS analysis published

The SEC has published an analysis of market data related to credit default swap transactions. The analysis is available for review as part of the comment file for rules proposed jointly with the CFTC to further define the terms 'swap dealer', 'security-based swap dealer', 'major swap participant', 'major security-based swap participant' and 'eligible contract participant' under Title VII of the Dodd-Frank Act.

The analysis - completed by the SEC's division of risk, strategy and financial innovation - is based on a sample of all new, risk transfer, dollar-adjusted, gold record transactions in both corporate and sovereign single name CDS submitted to the DTCC's Trade Information Warehouse between 1 January and 31 December 2011. A second analysis is based on DTCC monthly position data in single name CDS over the same sample period.

The SEC believes that the analysis could be informative for evaluating certain final rules under Title VII. "Analyses of this type particularly may supplement other information considered in connection with those final rules and the SEC staff is making this analysis available to allow the public to consider this supplemental information. The SEC staff expects that the Commission will consider the adoption of rules defining these terms in the next several weeks," it says.

CDS

Elpida auction due

The auction to settle the credit derivative trades for Elpida Memory Inc is scheduled for 22 March. The firm filed a petition for the commencement of corporate reorganisation proceedings with the Tokyo District Court on 27 February (SCI 29 February).

CDS

Banking sector indices launched

S&P Indices and ISDA have launched two new indices - the S&P/ISDA CDS US Financials Select 10 Index and the S&P/ISDA CDS European Banks Select 15 Index. The indices aim to provide a day-to-day measure of the credit quality of the US and European banking sectors.

The constituents of the two new indices are the most liquid and relevant names within the US and European banking sectors, with the objective of providing insight into how the markets view the credit risk of the majority of trading counterparties for OTC derivatives and other credit-sensitive transactions. Both indices are equally weighted and have no minimum ratings criteria for inclusion.

The indices target financial intermediaries that are seeking a standardised index to hedge broad financial counterparty risk. They may also be used as a basis for a credit default swap or to track the overall health of the US and European banking sectors.

CDS

ERC Ireland credit event called

ISDA's EMEA Credit Derivatives Determinations Committee has resolved that a failure to pay credit event occurred in relation to Eircom parent ERC Ireland Finance. The firm missed its FRN coupon payment scheduled for 15 February. An auction will be held in respect of outstanding CDS transactions referencing the entity in due course.

CLOs

CLO warning issued

Fitch has identified one implementation of the Volcker Rule that could have unintended consequences for corporate issuers that access capital through the leveraged loan market and CLOs. This risk has been also been noted by several industry associations, notably the Loan Syndications and Trading Association (LSTA).

The agency points out that CLOs do not engage in activities the rule is intended to restrict. However, it warns that CLOs could be included based on how the rule is interpreted or implemented.

The scope of the consequences could be staggering, says Fitch. "Roughly one-quarter of all US outstanding corporate loans are held by CLOs, according to data compiled by the LSTA. Slowing or halting this funding source could interrupt many corporate financing initiatives and slow growth in economic activities. It could also hit the US economy in a soft place during its nascent recovery."

The LSTA and other organisations have proposed that CLOs be treated as loan securitisations, which should not be considered as covered funds.

CMBS

Loan restructuring completed

The £175.66m Reference Loan no. 3 in the synthetic CMBS Estate UK-3 has been restructured. European asset-backed analysts at RBS note that successful CMBS loan restructurings have been less common in Europe than may be expected, so the result could prove to be a good template for other stressed loans.

Under the restructuring, a £200m portion of senior debt was carved out of the £239.42m whole loan facility. The senior debt will remain 73.37%/26.63% split between reference claim and remaining claim, while the sponsor will inject £10m cash ranking alongside the senior debt facility. New monies will meet the future capex requirements in the business plan in relation to new and revised letting targets for the shopping centres.

Additionally, the loan term has been extended to July 2015 from April 2013, with existing and new hedging on the facilities in place for the period. The ICR covenant has also been revised: it remains 0.75:1 until 30 June 2012; then increases to 0.80:1 until 31 December 2012, when it rises again to 0.90:1 until 30 June 2013; then it becomes 1:1 until maturity. Finally, the LTV covenant test is suspended until July 2015.

The facility agent may replace the asset managers if they fail to meet the key goals to be achieved by October 2013.

CMBS

CMBX rally losing steam?

The CMBX indices may be in a period of consolidation, according to CMBS strategists at Citi. They note that the CMBX rally has lost some steam in recent weeks, with the indices largely underperforming the cash and equity markets.

After peaking in January, synthetic AJ tranches - which had served as 'risk-on' trade candidates - have failed to keep up with the S&P 500 index during the market rally that began earlier this month. In contrast, 2006- and 2007-vintage cash AJs have posted double-digit price gains since early February.

Lower quality tranches remain vulnerable to market shocks and do not retain much, if any, fundamental value, the Citi strategists note. "The higher quality tranches continue to hold fundamental value, however, as triple-As and earlier-vintage AMs remain cheap in our base and stress scenarios and continue to avoid interest shortfalls. Delinquency rates also indicate some fundamental improvement, with the CMBX.3, CMBX.4 and CMBX.5 posting monthly rate declines of 55bp, 81bp and 118bp respectively."

CMBS

Freddie eyes five-year mortgages

Freddie Mac is in the market with the US$1.1bn FREMF 2012-K501, its first CMBS backed exclusively by multifamily mortgages with a five-year term. The transaction is expected to price this week and settle on 11 April.

"In the first quarter of this year, we have brought four K Deals to a vibrant agency CMBS market," comments Mitch Resnick, co-head of multifamily capital markets for Freddie Mac. "We are constantly looking for ways to enhance the scope of our lending and securities platforms in order to appeal to a variety of borrower and investor needs. This transaction, which is our first backed exclusively by five-year mortgages, continues this commitment."

The K-501 certificates will be offered to the market by a syndicate of dealers led by Wells Fargo and Morgan Stanley as co-lead managers and joint bookrunners. Bank of America Merrill Lynch, Credit Suisse and Guggenheim Securities will serve as co-managers.

The deal is backed by 50 recently-originated multifamily mortgages and comprises two senior principal and interest classes, two senior interest-only classes and a junior interest-only class. Moody's and Morningstar have assigned preliminary triple-A ratings to the four senior tranches of notes.

CMBS

Call for improved servicing disclosure

US CMBS investor concerns that servicers are increasingly basing workout strategies on the highest collectable fee can be quelled through improved disclosure, according to Fitch. The agency says it has been alerted to several instances where modification fees charged to the borrower have been significantly higher than expected and were not readily disclosed to investors.

Once a loan workout is complete, certain aspects of the modification - including alternatives considered, all fees paid and use of affiliates - should be publicly disclosed to the investors in that transaction, Fitch says. For future deals, the agency "would prefer to see an explicit outline for this disclosure and other applicable documents".

It adds: "CMBS special servicers should be compensated for work performed when restructuring a loan that is in distress or default. Ancillary fees should fluctuate based on amount of work, number and level of staff required and time to resolve. Servicers that demonstrate behaviour that violates or abuses this so-called 'servicing standard' on a continuous basis may be subject to rating downgrades."

CMBS

Special servicer switched

The operating advisor on Deco 17 - Pan Europe 7 has replaced Hatfield Philips with Deutsche Bank as special servicer for the Mayne loan. Moody's notes that, based on its assessment of the capability of Deutsche Bank to perform the role, the replacement will not result in a reduction or withdrawal of the current ratings of the notes.

The agency assumes that Deutsche Bank will fully comply with the servicing standards that are outlined in the original servicing agreement relating to the Mayne loan. However, it says that the strategy and timing regarding the future workout process for loans being subject to an event of default is of significant importance in relation to the credit risk posed to investors.

The Mayne loan represents 9.6% of the current outstanding pool balance and is secured by a portfolio of five mixed-use properties located throughout Germany. As per the latest investor report from October 2011, the loan was current and in primary servicing.

Deutsche Bank is the named special servicer on five other loans accounting for 25.1% of the deal's current outstanding balance; only one of the loans (Rockpoint, representing 9% of the pool balance) is currently in special servicing.

CMBS

EMEA special servicing activity reviewed

One EMEA CMBS loan was transferred into special servicing and no loans were fully worked out during February, according to Moody's monthly update on the sector. The agency's weighted average expected principal loss for loans in special servicing stands at 36%.

The newly transferred loan is the £429m City Point asset securitised in Ulysses (European Loan Conduit No. 27), backed by an office property in London (see also SCI's CMBS Loan Events database). The loan, which historically benefitted from rental guarantees from the sponsor for full debt service payments, suffered a payment default in January 2012. The noteholders currently rely on the servicer advancing for full interest payments.

Several property revaluations were also announced by special servicers in February. Of note was the revaluation of the properties securing the £171m Mapeley I loan securitised in Deco 6 - UK Large Loan 2. The valuation carried out following the transfer of the loan revealed that the value of the office portfolio had declined by 69% since loan origination in 2005.

As expected, meanwhile, the single loan securitised in Opera Finance (Uni-Invest) wasn't worked out in time for the legal final maturity of the notes. The non-payment of principal caused an event of default under the CMBS notes and an acceleration notice was served by the trustee, making the issuer security enforceable and changing the priority of payments at the note level.

Additionally, the allocation of recovery proceeds in Titan Europe 2006-1 at the January 2012 interest payment date caused the liquidity facility provider to declare an event of default under the facility agreement and cancel the commitment. The issuer subsequently announced that it is conducting an independent review of the transaction documents and factual background and that it will consult with relevant transaction parties before determining its response.

Finally, the named special servicer of a number of currently performing loans was changed during the month, including for eight loans (representing 79% of the pool) in Deco 8 - UK Conduit 2 - which currently has three loans in special servicing by Solutus Advisors (SCI 24 February).

Insurance-linked securities

Indemnity cat bond prepped

Swiss Re is in the market with Combine Re, an indemnity catastrophe bond exposed to US hurricane, storm and earthquake risk. The reinsured parties involved are COUNTRY Mutual Insurance Company and North Carolina Farm Bureau Mutual Insurance.

The transaction comprises US$100m class A and US$50m class B principal at-risk variable rate notes due 7 January 2015. Moody's has assigned provisional ratings to the notes of Baa1 and Ba3 respectively. An additional unrated class C tranche will also be issued.

The issuer is a Cayman Island exempted company that will provide fully collateralised, three-year aggregate excess of loss retrocessional protection to Swiss Re. Swiss Re will provide catastrophe aggregate excess of loss reinsurance in respect of the subject business of COUNTRY Mutual and NCFB under two separate reinsurance agreements, enter into two separate retrocession excess of loss agreements with Combine Re and cede those risks to noteholders. Proceeds from the offering will be placed in equal amounts into two separate trust accounts, one for COUNTRY Mutual and the other for NCFB, as collateral for the issuer's potential claim obligations to Swiss Re.

The ceded risks are the two reinsured parties' combined aggregate ultimate net losses resulting from the US perils of hurricanes, earthquakes, severe thunderstorms and winter storms - net of each franchise deductibles and catastrophe reinsurance programmes - for the three annual risk periods. The initial collateral securing the notes will be US Treasury money market funds initially rated Aaa, segregated in two separate trust accounts - one for NCFB and the other for COUNTRY Mutual.

Moody's quantitative analysis of the transaction is based primarily on the risk analysis performed by AIR Worldwide, the calculation agent.

RMBS

Mexican RMBS criteria updated

Fitch has updated its rating methodology for assessing credit risk in Mexican residential mortgage loan pools originated by banks and Sofoles/Sofomes that are used as collateral for structured finance transactions. The changes focus on loss given default (LGD) assumptions and primarily reflect the agency's view for a prolonged recovery process and discounted sales levels predicted for the coming years.

The revised assumptions include increased quick sales adjustments and decreasing house price decline, as well as adjustments to foreclosure costs and changes in timing for the total recovery process that vary by rating scenario. In addition, Fitch's views on loan modification programmes have been incorporated and the SHF property price index will now be included when analysing valuations greater than two years. Given the increasing level of non-performing loans (NPLs) in many of the existing portfolios, the revised assumptions are an important element of the outstanding ratings, the agency says.

Base foreclosure frequency assumptions, foreclosure frequency adjustments and rating scenario multipliers were revised in March 2011 to reflect the increased level of stress primarily experienced within the UDI-backed portfolios originated by Sofoles. These assumptions remain unchanged in the updated criteria, given that in Fitch's view the macroeconomic variables affecting default probability have remained similar to those of last year. The agency notes that its current frequency of foreclosure base case already incorporates a moderate stress from its long-run base-case view.

The net impact represents an average 5% decrease across rating scenarios in recovery assumptions and an additional stress on timing, which will impact ultimate loss severity. Based on preliminary analysis, Fitch believes that certain transactions with significant dependence on NPL cashflows may be downgraded by 1-2 notches on average. The majority of this will be concentrated in the Sofol originated UDI portfolios.

Fitch says it will complete its review over the next one to two months.

RMBS

Agency MBS portfolio wound down

The US Treasury Department has completed the orderly wind down of its agency MBS portfolio, generating a positive return of US$25bn for taxpayers. Treasury invested US$225bn in MBS during 2008 and 2009, with taxpayers receiving total cash returns of US$250bn from the portfolio through sales, principal and interest.

"The successful sale of these securities marks another important milestone in the wind down of the government's emergency financial crisis response efforts," comments assistant secretary for financial markets Mary Miller. "This programme helped support the housing market during a critical moment for our nation's economy and delivered a substantial profit for taxpayers."

In light of improved market conditions, Treasury announced in March 2011 that it would begin the orderly wind down of its MBS portfolio through the gradual sale of those securities over time.

RMBS

AOFM unloads RMBS in pricing exercise

The Australian Office of Financial Management (AOFM) says it has sold US$50m of RMBS so far this month. The assets were fixed rate bullet securities with a maturity due in November 2016.

The sale was made at an effective margin of 132bp over the interpolated swap rate. This compares with a margin of 150bp over the five-year swap rate when the securities were acquired by the AOFM in November last year.

This adjustment to the AOFM's holdings was undertaken as part of its portfolio management activity and to provide transparent pricing guidance to the market, it notes. It does not intend to make additional sales in current circumstances.

RMBS

BOS tender announced

The Bank of Scotland has announced tender offers at par for the class 5A notes from its MFPLC 4 and PENDE 2007-1 RMBS, which close on 2 April. The MFPLC 4 5A tranche is the last outstanding publicly placed note from the Mound Master Trust, due to be redeemed in November 2012, while the PENDE 2007-1 5A tranche is the last publicly placed senior note from the Pendeford Master Trust.

RMBS

Rating triggers waived

Noteholders in the RMAC 03-NS1, 03-NS2, 03-NS3, 03-NS4, 04-NS1 and 04-NS2 RMBS have voted to ignore certain rating-related triggers in the deals, following the downgrade of Barclays - acting as liquidity facility provider - to A-1 from A-1+. Securitisation analysts at S&P view the move as a short-term positive for transaction cashflow but a negative for counterparty risk.

A waiver has been granted that means the issuer does not have to comply with the following conditions: to find a replacement liquidity facility provider or make a liquidity facility stand-by drawing and place the proceeds on deposit with a bank or financial institution having the minimum rating requirements; to find a replacement authorised institution having minimum rating requirements under the administration agreement.

The waiver is effective for 12 months and shall be renewed on an annual basis unless Barclays is upgraded or it is cancelled by the note controlling party. It is subject to the condition that Barclays' short-term ratings would be at least A-1 from S&P, P-1 from Moody's and F1 from Fitch.

RMBS

Assured hits back

Assured Guaranty has responded to the placement of its debt ratings and insurance financial strength ratings under review for possible downgrade by Moody's. The agency cites constrained business opportunities for financial guaranty insurance and continued economic stress for US municipal, mortgage and European exposures.

Assured says it has been working with Moody's for some time, emphasising the improvements in its credit profile since the agency's last review in 2009. "As the current rating process is not yet complete, we are surprised that Moody's decided it had enough information to place Assured Guaranty on review for a possible downgrade," says the firm's president and ceo Dominic Frederico.

He adds: "In light of our improved financial strength over the last two years, Moody's action was unjustified and unwarranted. Assured Guaranty has not just, as Moody's writes, 'survived' the financial crisis but has demonstrated its resiliency, resourcefulness and financial strength. While we have paid nearly US$4bn in claims since the onset of the mortgage crisis to protect investors from losses related to our insured RMBS, our claims-paying resources to protect policyholders have grown from US$11.2bn in 2007 to over US$12.8bn today."

Since its last rating assignment, Assured has achieved record operating income of US$664m and US$604m - with operating ROEs of 14.9% and 12.1% - in 2010 and 2011 respectively. Since 2Q09 - the period Moody's last analysed - the monoline has reduced its insured portfolio's exposure by approximately US$105bn overall, including US$62bn in structured finance, of which US$11bn was RMBS. Additionally, to further strengthen its capital position, in January it entered into a US$435m excess-of-loss transaction for its US public finance portfolio.

Further, Assured says its business production continues to demonstrate a fundamental demand for its product. Since 2Q09, it has insured over US$58bn of US municipal bonds. In 2011 it guaranteed 1,228 new issues, representing an insured par of over US$15bn.

Moody's states that as part of its upcoming review it will focus on downside risk sensitivities in the RMBS area. Assured believes that activities - such as representation and warranty (R&W) collections and servicing interventions, along with the run-off of the portfolio and possible litigation awards - should offset potential concerns. It has so far received a cumulative total of US$2.4bn in settlement and put-back receipts and commitments from R&W providers in its RMBS transactions.